Benin

Porto-Novo

key figures• Land area, thousands of km2 113 • Population, thousands (2004) 6 918• GDP per capita, $ (2003) 528• Life expectancy (2000-2005) 50.6• Illiteracy rate (2004) 58

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BENIN’S MACROECONOMIC RESULTS have beensatisfactory since the early 1990s, with annual growthaveraging five per cent and inflation under control,accompanied by stable politics and great freedom ofexpression that is an example to the rest of Africa. Butthe mainstays of the economy have recently shownsigns of fragility, slowing economic activity in 2003 and2004.

Benin is very dependent on trade with neighbouringNigeria and was badly hit when the Nigerians steppedup import restrictions at the end of 2003. This happenedas Cotonou port, the country’s main trading centre, wasbecoming less competitive. Unlike the ports of Tema(Ghana) and Lomé (Togo), it has not benefited fromthe diversion of trade from Abidjan because it hascumbersome procedures for getting goods out of theport and high official (and unofficial) tariffs. The

country’s through-roads are also slowed by numerouspolice checkpoints.

The cotton sector, which provides income for morethan two million of the country’s 6.8 million peopleand is Benin’s main export, has been in major crisis since2002 because of sector reforms begun in the early1990s when world prices werelow. Underhand behaviour bysome in the sector is threateningthe new structure of the industryand disrupting operations.Recent harvests have been much poorer than expectedand have not exceeded 330 000 tonnes. As a result,national growth was held down to an estimated 2.2 percent in 2004 and the revenue shortfall is cutting intothe national budget and the government’s developmentplans.

Worsening trade relations with Nigeria and crisis in the cotton sector threaten the economy.

-10

-8

-6

-4

-2

0

2

4

6

8

10

2006(p)2005(p)2004(e)20032002200120001999199819971996

Figure 1 - Real GDP Growth

Source: Institut National de la Statistique et de l’Analyse Economique(INSAE) data; estimates (e) and projections (p) based on authors’calculations.

The outcome of the presidential election due inMarch 2006 is uncertain since neither President MathieuKerekou nor his main opponent can run again becausethey will be too old. The business sector is adopting a

wait-and-see attitude that hinders structural reformand depresses the economy. Growth of 3.1 per cent isexpected in 2005 and 4.2 per cent in 2006, below theaverage of the past decade.

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Recent Economic Developments

The economy is largely dominated by the informalsector, which occupies 95 per cent of the workforce,according to the 2002 census. The primary sector’sadded value is virtually 100 per cent informal, that ofindustry more than 60 per cent and of tradable services74 per cent. This makes it hard to assess theirperformance but helps explain why they can withstandexternal shocks. The cotton harvest was disappointingin 2004 and the country was hit by import restrictionsimposed by Nigeria. Growth over the year was estimatedat 2.2 per cent.

Agriculture has had problems since 2002 that haveprevented it being the motor of growth it previouslywas. The primary sector grew an average 5.5 per centa year between 1993 and 2002, but only 2.4 per centin 2002 and 3.4 per cent in 2003, mainly because ofproblems in the cotton sector. Growth was slightlybetter in 2004, mostly thanks to a good food cropharvest.

Apart from some areas of food shortage in thenorth, Benin has major food resources that make it self-sufficient. Cassava is the leading food crop, with morethan 2 million tonnes grown each year, but the 2004/05

harvest is expected to be down 9 per cent on theprevious very good years. Cereals output is chieflymaize, production of which is expected to amount to928 000 tonnes in 2004/05, up 25 per cent on theprevious year. Some of it is exported to the region,especially Nigeria, while other grains and tubers areconsumed locally.

Cotton is a mainstay of the economy and itsharvesting and processing contributes about 13 percent of GDP and occupies 300 000 farms andtwo million people out of a total population of6.8 million. Cotton also represents three quarters of allgoods exports. The government launched a reformprogramme in the early 1990s to open up the sectorand privatise the state firm that has long handled alloperations (providing inputs, gathering the harvest,ginning and marketing).

However, it proved difficult1 to realise and, togetherwith very low world prices, disrupted the sector andproduced poor harvests. After a peak of 412 000 tonnesof cottonseed in 2001/02, production fell back to about330 000 tonnes in 2002/03 and 2003/04. Operatorsin the industry think this can be improved on andginning capacity of 587 000 tonnes has been installed,well above actual production.

■ Africa ■ Benin

0

100

200

300

400

500

600

700

800

900

200420032002200120001999199819971996199519941993199219911990

Figure 2 - GDP Per Capita in Benin and in Africa (in current dollars)

Source: FMI.

1. See section on Structural Issues.

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■ Volume

0 1 2 3 4 5

Agriculture

Livestock, forestry and fishing

Manufacturing

Energy and Construction

Trade

Services

Government services

GDP

Figure 4 - Sectoral Contribution to GDP Growth in 2003 (percentage)

Note: National accounts include harvests of the year n/n+1 in the GDP of the year n, so the result of the 2003/04 harvest is carried over here.Source: Authors’ estimates based on INSAE data.

Agriculture

Energy and construction

ManufacturingTrade

Forestry, livestock and fisheries

Government services

Services

24%

11%

9%6%

18%

21%

11%

Figure 3 - GDP by Sector in 2003 (percentage)

Source: Authors’ estimates based on INSAE data.

Prospects for cotton in 2005 are mediocre. The2004/05 season began in an atmosphere of distrustand seems to be facing the same problems as in previousyears – some of the inputs were supplied outside officialprocurement channels and also late. The harvest isthus expected to be the same as in 2003/04.

The price to growers is also uncertain. Despite atimetable for setting an interim price in March-April2004 and a final one, related to world prices, in October-November, the final price to growers (200 CFAfrancs/kg) was not announced until the end ofDecember, demonstrating the difficulty of reaching a

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decision when the world price is low and budgetresources limited.

As in the 2001/02 season, the government pledgedto subsidise the sector despite the problem of findingthe money and the risk of worsening disruption ifoperators are not made to comply with the rules. Theapproach of a presidential election in early 2006 is notconducive to firmness, however, and makes a substantialincrease in production unlikely as long as the sectorreform is not sorted out.

Declining cotton production since 2002 has sloweddown manufacturing (chiefly ginneries and textilefactories), which had virtually zero growth in 2003and contracted more than 1 per cent in 2004.

The services sector, especially commerce, has beenhit by Nigerian restrictions on imports from Benin, theproblems of Cotonou port and the country’s lesscompetitive situation with the stronger euro. The sectorslowed down substantially, with the average 6 per centgrowth between 2001 and 2003 falling to about 3 percent in 2004.

Table 1 - Demand Composition (percentage of GDP)

Source: INSAE data; estimates (e) and projections (p) based on authors’ calculations.

1996 2001 2002 2003 2004(e) 2005(p) 2006(p)

Gross capital formation 17.6 19.7 18.5 20.3 18.2 18.7 18.8Public 6.1 6.8 7.4 7.5 7.0 7.2 7.2Private 11.5 12.9 11.1 12.8 11.2 11.5 11.6

Consumption 86.0 88.9 90.3 89.8 91.5 92.8 92.5Public 13.5 12.2 12.3 12.6 12.8 14.0 13.5Private 72.5 76.6 78.0 77.2 78.8 78.9 79.0

External sector -3.5 -8.6 -8.8 -10.1 -9.7 -11.5 -11.2Exports 26.5 22.3 22.2 21 19.5 16.9 16.4Imports -30.0 -30.9 -31.0 -31.1 -29.3 -28.4 -27.6

■ Cottonseed Production —— World price adjusted ---- Price to farmers

in FCFA/kg thousand of tonnes

0

50

100

150

200

250

300

350

400

450

500

0

90

180

270

360

450

2004/052003/042002/032001/022000/011999/001998/991997/981996/971995/961994/95

Figure 5 - Cotton production and prices in Benin

Source: INSAE.

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Growth in 2003 was driven by public and privateinvestment which levelled off in 2004 due to thegovernment’s budget problems and the depressedbusiness climate. After Nigeria’s import restrictions,Benin’s imports (which are mostly for re-export) andexports declined. Better relations with Nigeria and thelifting of many of the measures may restore a normallevel of exports to Benin’s big West African neighbourin 2005. However, mediocre cotton harvest prospectsrule out any significant rise in exports and the externalbalance will probably decline.

Macroeconomic Policies

Fiscal and Monetary Policy

Benin’s macroeconomic policy is mostly constrainedby limited budget resources. Though the countrycomplied with six of the eight convergence criteria setby the West African Economic and Monetary Union(WAEMU/UEMOA) in 2002, it has not managed toachieve basic fiscal balance and the tax burden is farbelow WAEMU’s target of 17 per cent of GDP. Taxcollection is rising but the customs service is weakenedby fraud (under-valuing of imports and improperexemptions).

Recurrent strikes persuaded the government togrant bigger pay rises than planned in 2002 and 2003.Social spending and public investment remained well

below targets and the country’s needs. The governmentalso has to face major external fluctuations. The verylow world cotton price in 2002 persuaded thegovernment to boost subsidies to growers.

Spending on parliamentary elections in 2003exceeded the budget. But the rise in world oil pricesonly had a very small effect on public finances becauseBenin imports electricity from Ghana and Côte d’Ivoire(mostly hydro power) and smuggling of oil productsfrom Nigeria is widespread.

Despite its problems, Benin has very good relationswith the Bretton Woods institutions because of itsgood management of the budget deficit (held below 4per cent of GDP between 1996 and 2002). So, sincecompletion of the three-year International MonetaryFund (IMF) poverty reduction and growth facility(PRGF) in March 2004, the government has beennegotiating for a new programme to cover 2005-07.

Current expenditure in 2003 was nearly 14 percent higher year-on-year and 6 per cent over budget.Expenditure totalling 34.8 billion CFA francs wasdeducted from the 2004 budget to cover the overrun.Budgeted operations had a 17 billion CFA francsrevenue shortfall at the end of first-quarter 2004, dueto a sharp fall in customs receipts (40 billion CFAfrancs over the year, according to the economy andfinance ministry) because of a fall in port activity afterNigeria’s restrictions on Beninese imports and a general

Table 2 - Public Finances (percentage of GDP)

a. Only major items are reported.Source: IMF and Ministry of Economy and Finance Data; estimates (e) and projections (p) based on authors’ calculations.

1996 2001 2002 2003 2004 (e) 2005 (p) 2006(p)

Total revenue and grantsa 17.9 17.8 17.3 18.5 18.3 18.5 18.2Tax revenue 11.8 13.5 14.4 14.9 13.2 14.4 14.2Oil revenue 3.7 2.5 1.0 2.0 3.4 2.4 2.3

Total expenditure and net lendinga 18.2 19.3 19.6 21.1 20.5 21.8 21.3Current expenditure 12.2 11.9 13.2 14.2 14.0 15.2 14.6

Excluding interest 10.0 11.0 12.5 13.6 13.6 14.8 14.2Wages and salaries 4.8 4.4 4.6 5.0 5.2 5.7 5.6Interest 2.3 0.8 0.8 0.6 0.4 0.4 0.4

Capital expenditure 5.9 7.4 6.2 7.0 6.5 6.7 6.7

Primary balance 1.9 -0.6 -1.5 -2.0 -1.8 -2.9 -2.7Overall balance -0.3 -1.4 -2.3 -2.6 -2.2 -3.3 -3.1

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economic slowdown that reduced direct and indirecttax revenue.

The stronger euro also boosted the price of Benin’sexports compared with Nigeria’s in 2003 and 2004,making them less competitive. Trade recoveredsomewhat from second-quarter 2004 but tax revenuefor the year was expected to be 13.2 per cent of GDPin 2004, substantially down from the 2003 figure of14.9 per cent, though it was made up for by a big risein grants, from 2 to 3.4 per cent of GDP.

As a result, the government decided to make budgetcuts totalling 30 billion CFA francs in 2004, involvingall ministries and causing disruption in the spendingchain. Investment was reduced and also spending underthe Heavily Indebted Poor Countries (HIPC) Initiative.Primary expenditure (budgeted current and capitalspending) was estimated at the end of September 2004as 234.5 billion CFA francs, well below the planned250.9 billion. Budgeted spending was down0.6 percentage points of GDP in 2004 year-on-yearbecause of less capital spending.

The budget suffers from persistent under-implementation of capital spending, while currentspending, especially for wages and salaries, exceedstargets. This is unlikely to change in 2005 and 2006since the government has promised civil service tradeunions, which staged several strikes in autumn 2004,that it will pay 200 billion CFA francs of salary arrears(resulting from a 1987-92 promotions freeze) andincrease salary scales. This may have a long-term effecton public finances because the payments will be partlydirect and partly through long-term treasury bonds. The2005 and 2006 budgets will also have to pay for theMarch 2006 presidential election.

So the budget deficit is expected to worsen to 3.3per cent of GDP in 2005 and 3.1 per cent in 2006,mostly due to increased current spending while taxrevenue should remain steady. Better capital spendingimplementation will require greater use of externalfunding. In the 2003 budget, 72.6 per cent of plannedcapital spending was implemented, but only 59.3 percent of scheduled external funding was used (only 40.3

per cent for grants), compared with 92.3 per cent ofdomestic funding.

The government has taken steps to boost taxcollection and streamline public spending. These includethe creation of a public spending monitoring system,compulsory use of a one-stop government paymentscentre, co-operation between the customs and taxdepartments and computerisation of their systems as amean of combating tax evasion. Reform of procurementprocedures and internal monitoring has begun andreduction of dependence on customs revenue is beingconsidered as part of economic opening-up. The aim isto collect more taxes from the extensive informal sector.

Despite pressure to increase wages and higher petrolprices, inflation is under control in Benin, as in otherWAEMU countries, because of the stronger euro andgood food crop harvests, Inflation fell from 4.2 per centin 2001 to 2.5 per cent in 2002, then to 1.5 per centin 2003 due to lower prices of food, beverages andtobacco. This was offset by sharp rises in the cost of“housing, water, electricity and other fuel” (5.1 percent) and transport (9.8 per cent) under the impact ofhigher oil prices.

Inflation was still under control in 2004, when it wasonly 0.1 per cent, though strong demand for foodproducts from neighbouring Sahel countries whose cropswere hit by locusts slowed the fall in food prices. Inflationshould be around 2.5 per cent in 2005 and 2006, belowthe WAEMU convergence criterion of 3 per cent.

External Position

Benin has a structural trade deficit because of thescale of its food imports and the informal nature of re-exports (imports are counted but exports are not wellmeasured). Remittances by Beninese abroad are toosmall to make up for the trade imbalance so that thecurrent account balance has a deficit of between 3 and8 per cent of GDP.

Benin remains mostly dependent on cotton exportsand on re-exports to Niger and Nigeria, which combinedaccount for two-thirds of the country’s goods and

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services exports. The government is trying to reducedependence on cotton by expanding agricultural exportsto cashews (processed and packed in India), palm oiland shea butter. But diversification is going slowly.

Exports to Nigeria are mostly informal and tradeconsists of a large amount of re-exports and informalexports (and re-exports) that amount to about 6 percent of GDP. The re-exporting is due to importerstrying to get round Nigeria’s tight trade restrictionsand customs duties averaging 37.2 per cent, comparedwith Benin’s 14.6 per cent. The closeness of Lagos

(130 km) is also a major factor, as well as securityproblems and congestion at its port of Apapa.

Nigeria expanded its list of banned imports at theend of 2003 from 28 to 44 kinds of product andtightened border controls, which cut activity at Cotonouport by 20 per cent between January and April 2004year-on-year. The Nigerians lifted the ban on Beninese-made goods in 2004 after discussions but maintaineda ban on re-exports. The sharp drop in imports toBenin in early 2004 was followed by a recovery,suggesting traders had found new informal ways to get

Table 3 - Current Account (percentage of GDP)

Source: BCEAO data; estimates (e) and projections (p) based on authors’ calculations.

1996 2001 2002 2003 2004(e) 2005(p) 2006(p)

Trade balance -5.2 -7.2 -8.2 -8.6 -8.5 -9.8 -9.5Exports of goods (f.o.b.) 18.0 15.0 15.9 14.2 13.5 11.4 11.0 Imports of goods (f.o.b.) -23.2 22.1 -24.2 -22.8 -21.9 -21.1 -20.5

Services -2.6 -1.8 -1.7 -1.8Factor income -1.9 -0.5 -0.5 -0.5Current transfers 4.9 6.5 4.5 4.8

Current account balance -4.9 -3.0 -5.9 -6.2

■ Debt/GNP Service/X

0

20

40

60

80

100

120

20032002200120001999199819971996199519941993199219911990

Figure 6 - Stock of Total External Debt (percentage of GNP)and Debt Service (percentage of export)

Source: World Bank.

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their goods into Nigeria. Despite the low level ofimports since 2003, Benin was unable to improve itstrade balance because of sluggish exports, especially ofcotton, so that the balance’s percentage of GDPremained steady in 2004.

Little short-term improvement is expected because,apart from Benin’s problems with Nigeria, Cotonouport, through which 90 per cent of the country’s tradepasses, is inefficient. With an annual capacity of4 million tonnes, it is West Africa’s fifth biggest, afterLagos (Nigeria), Abidjan (Côte d’Ivoire), Tema (Ghana)and Dakar (Senegal). Traffic increased substantiallybetween 1998 and 2002, but businesses complainedof delays in unloading and customs processing and ofhigh costs whether in the form of tariffs or corruptionand red tape. They also drew attention to the numberof police roadblocks at the port and all along thecountry’s through-roads.

Port activity has slowed since 2003 and more andmore goods have entered the country by other means.The significant growth of Lomé and Tema as alternativeports to Abidjan has jolted Benin’s political andeconomic decision-makers into awareness of theproblems of Cotonou’s port. Apart from the extracharges which businesses cite as an obstacle to the port’sdevelopment, tighter application by Benin of WAEMU’scommon external tariff may have hurt Cotonou, to theadvantage of Lomé. Benin’s major focus on Nigeria, tothe east, may also have lost it opportunities to the west.

Benin’s external debt was 832.6 billion CFA francsat the end of December 2003 (about 40 per cent ofGDP), 82 per cent of it due to multilateral creditors.The amount has fallen substantially since 2001 thanksto about 55.3 billion CFA francs of debt relief obtainedunder the HIPC Initiative since the country reacheddecision point in July 2000 and completion point inMarch 2003.

Structural Issues

Benin began to energetically open up its rigidlystate-controlled economy in the early 1990s and then

in the middle of the decade launched a profound reformof the cotton sector, handed some port operations overto the private sector and began divesting public servicecompanies. But the reforms have stalled in recent years.

The government chose to privatise the cotton sectorcompletely, though still with an entirely vertical structureand run by an association of growers, inputs suppliers,ginners and the government. Sonapra, the state cottonfirm in charge of all production and marketing, wasgradually transferred to the private sector from 1992.First to go was haulage of cottonseed, then distributionof inputs. Sonapra’s monopoly of ginning was endedin 1995. Licences were granted to three firms forcollecting and ginning and five more were granted in1997 and 1998.

Since 2000, Sonapra’s monopoly for marketingcottonseed has been abolished and management ofinput supply handed to the private sector (the inputssupply and management co-op, Cagia, was given thetask of choosing among the tendered bids). The priceto the grower has been negotiated since 2001 betweenproducers’ associations and ginneries belonging to thecotton profession association, AIC. But the last stageof the reform, privatising Sonapra’s remaining ginneries,was delayed and only three of the four lots scheduledfor sale have been divested so far under widely contestedconditions.

The reforms have been hampered by low worldprices, poor harvests in recent years and breakdownsin the new regulatory system, which was based on theassumption that everyone would obey the rules and thatthe government and the courts would ensure that itfunctioned correctly. But in the 2000/01 season, someinput distributors who had not been chosen by tendersold their products, some of them of poor quality, to“rebel” growers who produced nearly 10 000 tonnesof cottonseed (out of a total production of330 000 tonnes) in the 2003/04 season.

Some ginneries also refused to pay the 40 per centdeposit for their future purchases of cottonseed to thestate debt recovery and secure payments body, CSPR.These dissident ginners handled 60 000 tonnes of

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cotton during the 2003/04 season (including the 10 000tonnes from the rebel growers). The CSPR’s financialstability is vital, as it repays bank loans for inputs withthe deposits from the ginneries and also pays growersafter deducting the cost of the inputs. With someginners not paying their deposits and Sonapra’s latepayments, the CSPR was unable to pay growers ontime and in early December 2004 it still owed them1.2 billion CFA francs for the 2003/04 season.

The government seems reluctant to do muchabout the rebels. The dissident ginners appear to havegot public money to divert cotton to their factories.Despite their conduct, they were nevertheless amongthe bidders chosen to take over Sonapra’s ginneries.The July 2004 national cotton conference that wasmeant to settle the disputes was rejected by growersand the CSPR as unrepresentative. The commerceministry’s effort in the autumn to manage the depositsof the ginners directly was criticised because theaccount that was to receive the money was nottransparently managed.

This refusal to obey the rules by some of the partiesinvolved could spur others to leave the system altogether.The prospect of bigger profits, at least in the shortterm, could persuade other ginners to refuse to pay theCSPR and so buy cottonseed without paying for theinputs to produce it. The resentment of some growerstowards the bodies supposed to pay them may leadthem in turn to refuse to pay the 10 CFA francs tax tomaintain industry support structures.

All these problems leave the cotton sector lesscompetitive, with input debts unrecovered and vitalfunctions which have to be paid for by an increase inthe charges borne by those who stay in the system.They also cause growers to switch to other crops, usingfertilisers meant for cotton. In the longer term, thefragility of the system also risks affecting spending onresearch and development, leading, ultimately, to areduction in cotton quality.

To tackle the loss of competitiveness of the port ofCotonou in relations to its direct rivals(especially Lomé),the government has announced a economic revival

plan based on improving customs procedures, fightingcorruption, removing illegal checkpoints on roadsleading from the port and streamlining the one-stopoffice there. Removal of checkpoints from through-roadswill be studied with circumspection, however, becauseof the rise in crime it could engender.

Studies are being carried out into the constructionand franchising of a second deep-water port to relievecongestion at the existing one. A reform was alsolaunched in the late 1990s to open the present port toprivate management and a feasibility study has beencompleted. But the port’s strategic importance, especiallyfor customs revenue, makes any change a delicatematter. Strong trade unions and hesitant politicalleadership, as shown by the change in port director inautumn 2004 after only six months, have so far blockedthe reform. The authorities have also been thinking forsome years of installing a duty-free zone.

The government has said for several years it wantsto privatise public services such as telecommunicationsand electricity but little has been done. The post andtelecommunications office (OPT) was split into twooperations in May-June 2004, Benin Télécom and LaPoste du Benin. The plan is to open up the capital ofBenin Télécom in 2005 to a strategic partner, who willbe offered a capital stake of up to 40 per cent, as wellas to local investors and employees. The state will keep15 per cent of the capital.

The former state electricity firm SBEE has alreadybeen divided up and a consultant is evaluating its assets.The government plans to complete the public servicereforms by the end of 2005 but this deadline is unlikelyto be met as, at the end of 2004, the regulatory authoritywas still not in place.

Benin has clear comparative advantages (politicalstability, physically strategic position and modern portsand roads) but its business climate is not very suitedfor growth of the private sector. The country has drawnless foreign direct investment than other WAEMUmembers, except during the privatisation period of theearly 1990s, according to UNCTAD (the UNConference on Trade and Development).

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It says complicated bureaucracy, confusion overthe roles of the promoting bodies (such as the chamberof commerce and the one-stop shop), the weak legalsystem (lengthy procedures and lack of trained andindependent judges) and poor governance all seriouslyobstruct private enterprise. Costly procedures are alsovery discouraging. Setting up a business costs roughlytwice the per capita average annual income, accordingto the World Bank.

Financial intermediation is still very limited inBenin, as in other WAEMU countries. The penetrationratio (M2/GDP) has been no more than 32 per centover the past three years. Loans to the private sectorwere only 12 per cent of GDP in 2002. The financialsystem comprises eight commercial banks, two leasingcompanies, eight insurance firms and over 100 formal-sector micro-credit institutions. The insurance sectorhas grown considerably since 1995 but is still small.No local stock exchange exists and very few firms usethe regional one, the BRVM.

Three banks dominate what is a relativelyconcentrated banking market. All banks except oneare privately-owned and most are foreign. The sectoris generally solid and the banks have recently improvedtheir profitability and compliance with prudentialratios (except for risk concentration). The proportionof non-performing portfolios (5.4 per cent) is one ofthe region’s lowest, but though commercial bankshold more than 90 per cent of the financial sector’sfunds, their customers are few and mostly in urbanareas.

Micro-credit has boomed nationwide over the pastdecade, especially in the poorest regions where banksare few, and the sector managed to reduce its non-performing loans from 8 per cent in 1999 to 5 percent in 2003. But 2004 and 2005 have been difficultfor the sector because of the problems in the cottonsector, in which very many customers work.

The strengthening of the financial sector has notbeen matched by growth of funding for small andmedium-sized enterprises (SMEs). Benin is the onlyWAEMU country with an agreed definition of an SME(drawn up in 1997),2 but current data on the sector islacking. A 1997 survey said nearly half of all 666 SMEscounted were in commerce and the rest in construction,pharmacy, restaurants and other services. Only 17 percent were in industry.

A 1999 follow-up study by the ministry of industryand SMEs of 692 micro-enterprises3 said they weremostly informal since 80 per cent of them were notregistered by any public body and 97 per cent were notin the official business register. Most (72 per cent) werein agro-food.

The financial sector crisis in the 1980s wiped outall the special facilities for funding SMEs. Thecommercial banks were held to strict prudential ratiosguaranteeing the viability of the sector. So despite over-liquidity, the banking system provided SMEs with verylittle funds. The dearth of long-term funding was amajor block to firms wanting to invest. Banks also didnot have suitable means to assess the solidity of SMEsin the absence of a dependable legal structure (nocommercial courts, few property guarantees andproblems with activating them in the case of default).

So the commercial banks rely on trust and increasetheir loans to customers gradually as they prove theirreliability. They also give credit for commercial orders.Leasing was introduced by the Bank of Africa (BOA)in 1995 but is very little used because of recent problemsformal sector firms have had trading directly withNigeria, notably where frozen foods are concerned.

SMEs therefore mostly turn to micro-creditinstitutions, whose customers increased by 75 per centbetween 1998 and 2002 to reach half a million (about15 per cent of the workforce), while total savings deposits

2. Defined as any legally-constituted (officially-registered) business that keeps regular accounts, is not a subsidiary of a multinational company

and has between 5 and 50 permanent employees, share capital of between 1 and 50 million CFA francs or investments of between 5

and 500 million CFA francs.

3. Firms with share capital of 1 million CFA francs or less (or investments of less than 5 million) and with up to five permanent employees.

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rose by 160 per cent (to 32 billion CFA francs –$51 million – on 31 December 2002) and loans by 250per cent (to 46 billion CFA francs – $69 million). In thisway, despite its small size, Benin has more micro-creditinstitutions than any other WAEMU member country.

The average savings account size has changed littleover the years and is around 220 000 CFA francs($352), but the size of loans rose 44 per cent in fiveyears to an average 315 000 CFA francs in December2002 (133 per cent of per capita GDP).

Two parallel networks have developed – friendlysocieties, led by the savings and mutual agricultural

credit federation Fececam, which turns savings intoloans, and direct credit institutions, which get fundson the financial market and from government andfunding agencies, through the micro-enterprisedevelopment support project, PADME, and the SMEsupport association, PAPME.

Micro-credit is expensive (about 2 per cent monthlyinterest) and funding goes mainly to agriculture andcommerce, leaving out craft industries. So a large sectionof the population continues to use the old system oftontines4 to save and start up businesses. Micro-creditinstitutions also have their own funding problems,though the sector is slowly becoming more professional.

4. Tontines are freely recruited groups of people who on set dates pay in variable sums (from 25 CFA francs to 1 million) and take turns in

receiving the total payment. Non-compliance with the rules leads to social exclusion.

Micro-credit in Benin, a Robust Sector Funding SMEs: Fececam and Papme

Fececam (The Federation of Savings and Mutual Agricultural Credit Banks) groups institutions thatmake loans on the basis of collected savings. At the end of September 2004, it had 101 offices throughoutthe country (including a score in urban areas), 420 000 adherents, 31.5 billion CFA francs in deposits and24.5 billion CFA francs in loans to some 90 000 borrowers, mostly farmers, livestock owners and traders.

Fececam specialises in rural loans of between 100 000 and 2 million CFA francs over about eight months at2 per cent monthly interest. Security for loans is the existence of solidarity groups. In urban areas, it makes loansto traders who provide material security (plots of land, lorries and houses) for loans over 200 000 CFA francs.

Fececam has an overall collection rate of 89 per cent (95 per cent for loans to traders), with big variationsaccording to the state of agriculture. Fececam has trouble converting the short-term funds it collects intolong-term deposits, partly because the long-term savings deals it offers are not much taken up. It alsocomplains about the ineffective legal system, which makes it impossible to recover small debts, makes loansmore expensive and thus seriously limits the funding of SMEs. Strengthening risk protection for micro-finance users, an experiment that has been suspended for lack of funds, would certainly reduce the dangerof defaults.

Papme (Association for the Promotion and Support of SMEs) was set up in 1993 as a project backedby the government and the World Bank and became an economic association in July 1999 with the objectiveultimately of raising money on the capital market and so becoming more independent. It originallyencouraged the growth of SMEs but since 2000 has focused on access to funding.

Papme has 25 offices around the country but most of its activity is in urban areas. It uses mainly externalfunding but since 2003 has been developing means to collect savings (standard, demand and time deposits).It has extended its range of financial products to include guarantees to firms, money transfers, investmentcredits and individual loans. It made loans of 21 billion CFA francs in 2003 (to 11 233 customers – 48 percent more year-on-year), mostly short-term (93 per cent) and to commerce (90 per cent). The collectionrate was 95 per cent.

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The government drafted a special programme in2001 to promote SME/SMIs between 2002 and 2004with the aim of boosting their productive capacity.The authorities aim to help the private sector bysupporting various micro-credit institutions and settingup a guarantee fund run by PAPME and PADME.The programme will be completed with a fund topromote SME/SMIs through the funding of surveysand assistance, as well as the provision of risk capitaland loan guarantees. But these measures and institutionsto help SMEs are still not very common and are mostlydeveloped by donors over periods which are sometimesunsuited to the need for long-term development.

Political and Social Context

Benin is politically stable and has held free electionssince 1990. Democracy has been accompanied bydecentralisation, confirmed in the country’s first localelections in December 2002, but lack of trained peopleand local funding has greatly slowed the planned transferof responsibilities and resources. President MathieuKerekou was elected to a second term in March 2001while parties backing him won a large majority inparliamentary elections in March 2003.

The next presidential election is due in March 2006,but neither Kerekou nor his main rival, former PresidentNicéphore Soglo, will be eligible because of the age limitset by the national constitution. Amending theconstitution to allow them both to stand is being fiercelydebated but this seems increasingly unlikely due to lackof time before the vote. The vigour of civil society, themedia and trade unions also makes such a change unlikely.

Despite its political stability, Benin has governanceshortcomings, serious corruption and a weak legal system.Transparency International put the country at 77th placeon its 2004 worldwide corruption index, with a mark of3.2, level with Egypt, Mali and Morocco. The country’sfreedom of expression has highlighted these problems,making comparison with less democratic countries difficult.

The stagnation of Cotonou port, linked to problemsin the cotton sector, seems nevertheless to be a sign of

serious governance problems. A five-month trial endedin June 2004 with the jailing of officials and judges forforging expenses claims between 1996 and 2000. Theauthorities, who have adopted an anti-corruptionstrategy, set up a national corruption monitoring centrein September 2004. The anti-corruption laws exist butthey are hard to enforce in a weak legal system that makespunishment little credible. This creates discontent incivil society and fuels protests and strikes.

Benin has made a radical switch since 1990 froma state media monopoly to complete freedom ofexpression, something quite rare in Africa, and thewritten press is free and energetic. But its impact islimited since it is mainly directed at an educated elitein a country where barely 40 per cent of people canread. It also seems not to be echoed very much by civilsociety, the legal system and the government. Employersand trade unions are very active but are mostly interestgroups with special demands.

Benin’s relations with its neighbours have beendominated since 2003 by problems with Nigeria,starting in mid-2003 with a scandal centred on abusinessman from Niger, Tidjani Hamani, living inBenin and accused of handling cars stolen in Nigeria.The Nigerian government accused Benin of notcombating cross-border crime and closed the borderfor a week. Curbs on imports from Benin were greatlytightened in January and March 2004 and Benin isseeking ways to reduce dependence on its neighbour.

The country is one of the main promoters of theWorld Trade Organisation (WTO) Cotton Initiativeto eliminate export subsidies and create a fundingarrangement to cover losses.

Benin is small, with 6.77 million inhabitants (47per cent of them under 14) and a social developmentlevel similar to its neighbours. Infant mortality (forchildren under 5) is 146.4 per 1 000 according to the2002 census, compared with Ghana (88), Nigeria (127),Togo (131), Burkina Faso (154) and Niger (203). Lifeexpectancy is 50.8, about the same as Togo (50) andNigeria (51.3). Benin is placed 161st out of 177 countrieson the worldwide Human Development Index compiled

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by the UN Development Programme (UNDP) and,despite improvements in health and education, is unlikelyto achieve the 2015 Millennium Goals.

The fight against poverty, spelled out in a povertyreduction strategy paper (PRSP), involves medium-term improvement of the macroeconomic situation,boosting human skills and environmental management,strengthening governance and getting poor peopleinvolved in decision-making and production.

But a 2003 progress report on the PRSP’simplementation said poverty was only being reducedslowly. It said 28.5 per cent of Beninese were poor in2002 (29.3 per cent in 1999), that monetary povertywas worse in rural areas (31.6 per cent) than in towns(23.6 per cent). Inequality among poor people worsenedbetween 1999 and 2002 as urban poverty deepened.

A questionnaire for basic welfare indicators for2003 showed that 22 per cent of people lived in extremepoverty and did not get enough to eat, resulting in 30per cent of children under five being malnourished in2001. They also had retarded physical growth whichworsened between 1996 and 2001. This is disturbingbecause the country had good economic growth (5.3per cent) at the time and because the cotton sector’scurrent problems may make things worse for the ruralpopulation.

Malaria is very common, affecting 36 per cent ofall ill people in 2003 and 120 people per 1 000. Butdeaths from it have steadily declined, from 316 in every10 000 cases in 1996 to 70 in 2002. The governmentwants to reduce malaria morbidity and mortality 30per cent by 2005.

The incidence of HIV/AIDS is quite small andstable, as in Ghana. Only 1.9 per cent of pregnantwomen in Benin were infected in 2002 (2.3 per cent.in Cotonou). The government focused on preventionand limited care of the ill to avoid the disease spreadingin a country that is a much-used transit route foroutsiders. Tests are free but a basic diagnosis is expensive,at 40 000 CFA francs ($73.50). Adult patients arerequired to contribute to the cost of their anti-retroviral

drugs in proportion to their income, though most paythe minimum (1 000 CFA francs).

Health care is accessible for 82 per cent of Beninese,though it varies widely by province (50 per cent inLittoral, 67 in Zou and 71 in Collines). Many localclinics are not yet up to standard and properly equipped.Health-care workers are in short supply because verymany have retired and not been replaced and new onesare not well-trained. Only 35 per cent of the populationused the health facilities in 2002, reflecting the inadequateservices but also obstacles to access, such as extra charges.

Benin has very low literacy – 42 per cent in 2004.Among its neighbours, Ghana has 75.9 per cent, Togo 62.2,Nigeria 69.4, Burkina Faso 27.5 and Niger 18.2 per cent.The figure reflects poor education of the adult population.The UNDP says 98 per cent of school-age boys are inschool but only 57 per cent of girls. Gross primary schoolenrolment has risen from 55.7 per cent in 1990 to 87 percent in 2003. But gender disparity remains large and theoverall primary enrolment figure nationwide was 95 percent for boys and 79 per cent for girls.

Only 49 per cent of boys and 35 per cent of girlscompleted primary education in the 2002/03 schoolyear. The government wants to increase the overallprimary completion figure from 46 per cent in 2001/02to 56 per cent in 2005/06. Its action programme aimsto boost enrolment of girls from 65 to 80 per cent inprimary and from 10 to 20 per cent in secondarybetween 2001 and 2006.

Laws that comply with International LabourOrganisation norms ban children between 6 and 14from working, but a quarter of all children (includingover 55 per cent of girls) between 6 and 9 had somekind of economic activity in 2002. Some of them(estimated at 10 000 between 1996 and 2000) weretrafficked throughout West Africa, where Benin is acentre of the trade. The children were sent to Côted’Ivoire, Gabon and Nigeria to do domestic labour orwork in mines or export agriculture. The situation ishard to tackle because it is part of the country’s traditionsand arises from the poverty of some parents and weakborder controls.